In response to the lowering of the lending rate for home loans, the housing finance companies have increased the margin on home loans to a 25 percent.

Margin money is the difference between the total cost of a housing project and the loan amount sanctioned. The increase in the margin amount implies that buyers have to contribute more sums from their pocket for a securing loan.

"We finance between 75% to 80% of the home cost". Ironically, official websites of both the institutions still state the maximum financing limit as 85%," said client executive, HDFC Housing Finance.

Although no formal comments have been made on reduction of margin, the recent visits to HDFC Housing Finance and LIC Housing Finance evident that the market majors have increased the required margin to 25 percent and 20 percent respectively from the earlier 15 percent. Quoting an official, LIC Housing Finance, "We have raised the margin requirement to 25% from 15% earlier as the condition was such in the last few months. Now we finance upto 75% of the house price."

Explaining the basis for margin increase, T S Narayanasami, chairman, Indian Banks' Association said, "By doing so (raising the margin requirement), the financiers have nullified the impact of reduced interest rates. The aim at this moment should be to increase lending for housing."

The decline in interest rates for home loans commenced last year when the public sector banks reduced the interest rate on housing loans upto Rs 5 lakh to 8.5 percent and above Rs 5 lakh to Rs 20 lakh to 9.25 percent, in response to a government call. Subsequently, the private banks and the housing finance companies reduced the lending rates. HDFC is offering home loan at 9.5 percent for up to Rs 30 lakh, while LIC Housing Finance is offering home loan of upto Rs 20 lakh at floating rate of 9.75 percent.

Allen CA Pereira, chief managing director, Bank of Maharashtra cited, "Risk weight on home loans is very high. That may be one of the reasons why these institutions have raised the margin requirement."

The risk weight set by RBI for housing finance companies varies from 50 to 100 percent, depending on the loan amount. Financing institutions have laid stressed on reducing the risk weight to enable them infuse more capital in business for lending and earn higher returns.

SK Goel, chairperson and managing director, UCO Bank said, "Higher margin requirement is a consideration for financing institutions for giving loans at lower interest rates. Also, continuously reducing home prices may put to risk the funds given by the financiers."

Considering the trends on falling home prices, Goel said, "If the home prices come down by another 20%, we would think of raising the margin requirement by 5% from 15% at present."